Overview of Alberta MLAs on CAODC: Oil and Gas Industry Presentation

1. Presentation to the Alberta MLAsMark A. Scholz CAODC President

2. Overview • Introduction to the CAODC • Who is the CAODC? • The work of the Association • What our members do? • How to measure our industry’s strength • State of the Industry Report • Economic Value • Commodity Prices • Impact to Drillers and Service Rigs • 2016 Forecast • Economic Consequences • Opportunities • Alberta Royalty Review • Four Ways to Look at Global Carbon Footprints

3. About the Membership Land Drilling Contractors 40 Land-based drilling rig fleet 754

4. About the Membership Service Rig Contractors 82 Service rig fleet 1030

5. About the Membership Offshore Drilling Contractors 3 Offshore rig fleet 6

6. CAODC remains true to what its founding members envisioned in 1949: to promote strong, safe and efficient operations in Canada’s rig sector. • Operational Excellence – Industry Standardization • Recommended Practices (RPs) • Training/Competency • Health, Safety & Environment (HS&E) • Business Processes • Communications & Advocacy • Labour challenges • Market access • Competitiveness • Effective regulation and public policy, harmonization • Industry education – public and government • Worker outreach and recruitment • Statistics – Rig Activity (Utilization, Operating Days)

7. Oil & Gas Basics The Life Cycle of a Well 2.A service rig is brought to the site after a drilling rig's work is complete 1. Drilling rig drills down to discover the viability of a basin. 3. The pump jack is used when a well is 'on-stream.’ The machinery in the pump jack mechanically pulls oil or gas to the surface.

8. Comparison of Business Models Drilling/Service Rig Contractor Service & Supply Exploration & Production (E&P) Assets: Rigs/equipment, people Revenue: Fee for service, day rate Implications: Rigs must be contracted in order to generate cash flow. Assets: Producing well(s) Revenue: Production multiplied by the spot or contract rate. Implications: E&Ps have continuous cash flow from a producing well(s), even in a low price environment.

9. Three Ways to Measure Rig Activity • 1. Rig Counts • Knowing how many active drilling rigs are at work indicates how busy the rest of the oil and gas industry is. • One (1) Active Rig = 135 direct and indirect jobs • Oil and gas is a labour intensive industry and generates jobs: • directly at the rig (approx. 20) • indirectly in the oilfield service sector (approx. 115) • in rural communities near oil and gas exploration and production

10. Three Ways to Measure Rig Activity 2. Rig Utilization Rig utilization is the percentage of active rigs. In Canada, rig utilization has a distinct annual cycle. Rigs are busiest in the winter and experience a period of low rig activity called spring break-up. The activity cycle is very pronounced for drilling rigs (fewer drilling rigs work in spring and summer) and slightly less pronounced for service rigs.

11. Three Ways to Measure Rig Activity 3. Operating Days & Operating Hours Rig contractors charge for services based on operating days. Operating days reveal the strength of the rig sector better than well counts. Currently, oil and gas companies in western Canada are drilling and maintaining complex horizontal wells. This means drilling contractors are drilling fewer wells, but they're working as many operating days.

13. Economic Value of the Industry • Largest private sector investor in Canada ($48 billion estimated in 2015, down from $81 billion in 2014) • Annual government revenues of $17 billion (three year average to 2014) • Employs approx. 450,000 in Canada (direct & indirect) • Canada is the 5th largest producer of natural gas globally • Canada is the 5th largest producer of crude oil globally • GDP Impact provincially of the oil and Gas industry across Canada between 2015-2025 (CERI 2015) - $7.6 trillion • AB = $5.9 trillion • BC = $765 billion • ON = $395 billion • SK = $362 billion • MB = $32 billion • QC = $124 billion • NL, NB, NS, PEI, NWT, NV, YK, = $29 billion

14. Economic Value of the Industry Oil Sands • 2014 capital expenditure of $33.9 billion, 2015 forecast down to $23 billion • The Oil Sands industry will utilize: • over 20,300 Alberta companies as suppliers and business partners • over 2,300 Canadian companies (outside Alberta) as suppliers and business partners • over 300 Aboriginal owned companies as suppliers and business partners • Oil Sands development is expected to contribute over the next 20 years: • $4.0 trillion to the Canadian economy (CERI 2015) • pay an estimated $1.2 trillion in provincial and federal taxes (CERI 2015)

15. Since July 2014 – 71% drop in pricing in North American prices (WTI) ($100/bbl to $29/bbl) The story is worse for Canadian heavy crude producers who sell at a discount for less than $20/bbl. Source: ARC Financial

16. Brent Oil Price Vs. Global Over-Supply Estimate first half of 2016 supply-demand imbalance is 1.5M barrels. Source: IEA

17. 40% drop in market value Trillions of dollars in global market value lost, impacting retirement funds, jobs, businesses, communities and future investment opportunities. 50% drop in market value Source: ARC Financial

18. Where are Prices Going? Here is what the future/forward strips (January 12, 2015) look like. Source: ARC Financial

19. What do these prices mean for Canadian energy producers? Most of North American production is under threat. Source: Wood Mackenzie

20. What do these prices mean for global energy producers? All global jurisdictions but Saudi Arabia are under threat. Source: Energy Aspects

21. But if you include OPEC median budgetary breakeven price, even Saudi Arabia is feeling the pressure of the low price environment. Source: OPEC "break-even" prices in 2012. (Matthew Hulbert/European Energy Review)

22. What is behind the lower price environment? A traditional supply / demand imbalance. 1. Global Oil Demand Slow global growth (i.e., China) resulting in low demand growth. Source: ARC Financial

23. What is behind the lower price environment? A traditional supply / demand imbalance. 2. OPEC Production OPEC aka Saudi Arabia’s market share strategy. Source: ARC Financial

24. What is behind the lower price environment? A traditional supply / demand imbalance. 3. US Production Record production from the US resulting in high inventories. Iranian lifted sanctions to add an estimated 500k to 1mm/bpd. 5 MMB/d to 10MMB/d (2011 – 2015) Source: ARC Financial

25. Impact on the drilling and service rig community… Source: CAODC

26. Lowest active rig count since the 1980s. • Lowest utilization recorded by CAODC (1977). • Lowest operating days in over two decades. • Lack of winter drilling – Q1. Source: CAODC

27. Source: CAODC

28. Source: CAODC

29. Estimated Capital Flow in the Canadian Oil and Gas Economy for 2015Industry Revenue, Cash Flow, Reinvestment Drilling Activity and Production Source: ARC Financial

30. Impact of declining commodity prices in 2015 Revenue • Industry revenues down 40% • $150 billion in 2014 to $90 billion in 2015 • Oil and gas share of TSX down from 20% in 2014 to 12% in 2015 • Announced layoffs to date – 40,000 direct. • Direct & indirect – 100,000 Canadians Source: CAPP, ARC Financial

31. Impact of declining commodity prices in 2015 Capital Investment • Canadian capital investment show significant year/year reduction • 2015 down 41% reduction in 2015 from 2014 • $81 billion in 2014 to $48 billion 2015 • 2016 investment down at least 12% from 2015 • Oil sands down almost one-third in 2016 from 2014 • Upstream sector still largest private sector investor in Canada Source: Statistics Canada

32. Capital Investment in Canada Combined Capital Investment Source: CAPP

33. Impact of Declining Commodity Prices in 2015 • Announced layoffs to date – 40,00 direct • Direct & indirect – 100,000 Canadians (CAPP) • Land sales are down across Western Canada • Bonus paid down from $1.1 billion in 2014 to $375mm in 2015 • In Alberta for example, the price paid per hectare, is down about 60 per cent, selling on average for $185 this year compared to $453 last year Source: CAPP

34. Time Out Let’s talk about the opportunities!

35. Capital Investment in Canada World Oil Reserves 100% Source: CAPP

36. Market Access and Diversification Traditional Markets vs. Non-Traditional Markets World natural gas consumption 1990 – 2035 (trillion cubic feet) Source: EIA

37. Market Access and Diversification Traditional Markets vs. Non-Traditional Markets Net Oil Imports Source: CAPP

38. Market Access and Diversification Canadian Oil Sands & Conventional Production Source: CAPP

39. Market Access and Diversification Quebec imports 1/3 of its oil from 5 corrupt nations Source: Resource Works

40. 2015/16 Royalty Review • Objectives: • To provide optimal returns to Albertans as owners of the resource. • To continue to encourage industry investment. • To encourage diversification opportunities such as value-added processing, innovation or other forms of investment in Alberta.

41. 2015/16 Royalty Review • Optimal Returns? What about… • High paying, high skilled job opportunities for Albertans. • The service sector is a benefactor of industry activity and are locally owned and operated in the province. • Small businesses such as hotels, restaurants, retail, etc. are a product of positive externalities from industry activity. • What about corporate, personal and fuel taxes, etc. that are created through industry activity? • Is this all about optimizing government royalty revenue or optimizing benefits to Albertans? The two concepts are not necessary mutually inclusive.

42. 2015/16 Royalty Review • CAODC Position • Royalties should be lowered to offset the increased cumulative costs to industry in order to preserve Alberta’s competitiveness. • 20% corporate tax increase • Higher carbon levies • Royalty rates should optimize the benefits to Albertans and not necessarily government revenue. • This is not a pure business decision. • The government should consider being the most competitive rather than middle of the road.

43. Four ways to look at global carbon footprints

44. Four Ways to Look at Global Carbon Footprints 1. INTENSITY Energy efficiency has helped many developed nations reduce their GHG intensity – emissions per unit of GDP. (millions of metric tons) Source: National Geographic

45. Four Ways to Look at Global Carbon Footprints 2. PER CAPITA (millions of metric tons) Countries with large populations, including fast-developing countries like India, have low emissions per capita compared to many industrialized countries. Source: National Geographic

46. Four Ways to Look at Global Carbon Footprints 3. CURRENT EMISSIONS (millions of metric tons) China is the world’s top contributor of GHGs, followed by the United States. Source: National Geographic

47. Four Ways to Look at Global Carbon Footprints 4. CUMULATIVE EMISSIONS (millions of metric tons) Measured since 1850, reflecting historical industrialization, emissions from the United States and Europe far surpass those of other nations. Source: National Geographic

48. Oil Sands Statistics Environmental • Oil Sands GHG emissions have declined 30 per cent per barrel from 1990 to 2013. • Canada produces about 2% of global C02emissions. Oil Sands account for 8.5% of Canada’s GHG emissions while transportation accounts for 23%. Source: CAPP

49. Canadian Association of Oilwell Drilling Contractors Suite 2050, 717-7th Avenue SW Calgary, AB T2P 0Z3 Tel: 403-264-4311 Fax: 403-263-3796 Web: www.caodc.ca